oversight

Rural Development: Financial Condition of the Rural Utilities Service's Loan Portfolio

Published by the Government Accountability Office on 1997-04-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 the Budget, House of Representatives



April 1997
                 RURAL
                 DEVELOPMENT
                 Financial Condition of
                 the Rural Utilities
                 Service’s Loan
                 Portfolio




GAO/RCED-97-82
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-275588

                   April 11, 1997

                   The Honorable John R. Kasich
                   Chairman, Committee on the Budget
                   House of Representatives

                   Dear Mr. Chairman:

                   To assist in the development of infrastructure in the nation’s rural areas,
                   the Rural Utilities Service (RUS) in the U.S. Department of Agriculture
                   (USDA) made or guaranteed about $10.4 billion in loans during fiscal years
                   1992 through 1996. Because of the concerns you raised about the financial
                   risks associated with RUS’ lending, we examined the (1) financial condition
                   of the electricity, telecommunications, and water and waste disposal loan
                   portfolios and (2) financial characteristics of borrowers having electricity
                   and telecommunications loans.1 We did not examine the financial
                   characteristics of borrowers with water and waste disposal loans because
                   most are public entities rather than private firms.


                   At the end of fiscal year 1996, over $8 billion of the total $42.5 billion in
Results in Brief   outstanding principal on the Rural Utilities Service’s electricity,
                   telecommunications, and water and waste disposal loans was owed by
                   borrowers that were experiencing financial problems (i.e., they were
                   delinquent, in bankruptcy, or likely to default on loan repayment in the
                   future). Almost all of this amount was owed by 12 electricity loan
                   borrowers, representing less than 2 percent of the total number of
                   electricity loan borrowers. These 12 borrowers owed almost 25 percent of
                   the outstanding electricity loan portfolio. Of the $5.2 billion in outstanding
                   principal on the telecommunications loans, none was owed by borrowers
                   experiencing similar financial distress. Of the slightly more than $5 billion
                   in outstanding principal on water and waste disposal loans, $43 million
                   was owed by 70 delinquent borrowers that made up less than 1 percent of
                   total borrowers and that owed less than 1 percent of the outstanding
                   portfolio.

                   Most electricity and telecommunications loan borrowers had favorable
                   financial characteristics at the end of calendar year 1995. For example,
                   year-end reports to the Rural Utilities Service showed that more than 98
                   percent of the electricity loan borrowers and more than 99 percent of the


                   1
                    RUS operates loan programs formerly administered by other USDA agencies. In this report, we refer
                   to these loans and programs as RUS’ loans and programs.



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             telecommunications loan borrowers had positive equity at the end of 1995.
             About 95 percent, or a total of 1,610 borrowers, had equity of $1 million or
             more. Similarly, the year-end reports showed that about 96 percent of the
             electricity loan borrowers and about 98 percent of the telecommunications
             loan borrowers made a profit in 1995. About 92 percent, or a total of 1,565
             borrowers, made a profit of $100,000 or more. However, 10 electricity and
             3 telecommunications loan borrowers had negative equity at the end of
             1995. Nine of these electricity loan borrowers owed about $6.2 billion as of
             September 30, 1996; the loans of the 10th borrower were resolved prior to
             that date when the borrower made a partial payment and the agency wrote
             off the remaining debt. The three telecommunications loan borrowers
             owed about $5.4 million as of September 30, 1996. Also, 38 electricity and
             14 telecommunications loan borrowers did not make a profit in 1995; these
             borrowers owed about $1.2 billion and about $103 million, respectively, as
             of September 30, 1996.


             USDA  is the federal government’s principal provider of loans used to assist
Background   the nation’s rural areas in developing their utility infrastructure. Through
             RUS, USDA finances the construction, improvement, and repair of electrical,
             telecommunications, and water and waste disposal systems. The agency
             provides credit assistance through direct loans and through repayment
             guarantees on loans made by other lenders.

             Electricity loans are made primarily to electric cooperatives; more than 99
             percent of the borrowers with electricity loans are nonprofit cooperatives.
             Direct loans are made to construct and maintain the distribution facilities
             that provide electricity to users, and guarantees are provided on loans to
             finance the construction of electricity generating and transmission
             facilities. Telecommunications loans—both direct and guaranteed—are
             made primarily to telephone cooperatives and commercial companies to
             build and improve telephone and telecommunications facilities and
             services; about 28 percent of the borrowers with telecommunications
             loans are nonprofit cooperatives, and about 72 percent are for-profit
             companies. RUS also administers the Rural Telephone Bank (RTB) loan
             program, in which direct loans are made to supplement the financing that
             telephone cooperatives and commercial companies receive from RUS
             through the telecommunications loan program.2 Water and waste disposal
             loans, either direct or guaranteed, are made to public bodies and nonprofit
             associations; about 80 percent of the borrowers with water and waste

             2
              RTB is a government-private corporation with federal agency status until it is privatized through the
             retirement of the stock that the government owns. Privatization began in fiscal year 1996, when RTB
             purchased $18 million of the federally owned stock.



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                                      disposal loans are public bodies, and about 20 percent are nonprofit
                                      associations. Water loans are made to improve the storage, treatment, and
                                      distribution of water, and waste disposal loans are made to collect, treat,
                                      and dispose of waste, including solid waste and storm drainage. (App. I
                                      provides additional details on each of the utility loan programs.)


RUS’ Recent Loan                      During fiscal years 1992 through 1996, RUS made or provided USDA
Obligations                           guarantees on slightly more than 6,150 utility loans, which totaled about
                                      $10.4 billion. Table 1 shows the level of loans in each of the utility
                                      programs.

Table 1: Total Number and Amount of
Utility Loans Made or Guaranteed by   Dollars in millions
RUS, Fiscal Years 1992-96                                                    Total number        Total dollar         Average dollar
                                      Program                                     of loans    amount of loans        amount of loans
                                      Electricity                                     880              $ 4,352.4                   $4.9
                                                               a
                                      Telecommunications                              510                2,575.1                    5.0
                                      Water and waste disposal                      4,764                3,464.3                    0.7
                                      Total                                         6,154             $10,391.8                    $1.7
                                      a
                                          Includes Rural Telephone Bank loans.

                                      Sources: USDA, Budget Explanatory Notes for Committee on Appropriations, fiscal years 1994
                                      through 1997; RUS’ reports; and as calculated by GAO.



                                      Direct loans accounted for 6,033 of the total loans and for $8.9 billion of
                                      the total loan amount. The other 121 loans had USDA guarantees—83 loans
                                      were electricity or telecommunications loans, and 38 were water and
                                      waste disposal loans. All electricity and telecommunications loans that
                                      received USDA repayment guarantees during this 5-year period were made
                                      by the Treasury’s Federal Financing Bank (FFB);3 all water and waste
                                      disposal loans that received guarantees were made by commercial lenders.
                                      (App. I provides detailed information on direct and guaranteed loans in
                                      each of the utility loan programs for fiscal years 1992 through 1996.)


RUS’ Recent Cost for                  RUS’ cost for the utility loan programs totaled about $1.4 billion in fiscal
Operating the Utility Loan            years 1992 through 1996. This cost consists of two components: federal
Programs                              subsidy costs and administrative costs for salaries and other expenses.
                                      The subsidy cost under credit reform (post-fiscal year 1991 credit)


                                      3
                                       Loans made by the FFB that have USDA repayment guarantees are treated in RUS’ financial
                                      statements as direct loans.



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                                        includes net present value estimates of (1) the interest costs associated
                                        with loans made at rates below the rate at which RUS borrows from the
                                        Treasury, (2) default costs, (3) fees, and (4) other costs and revenues.4
                                        (App. I presents a more detailed discussion of the principles and
                                        requirements of credit reform.) Table 2 shows RUS’ reported costs for each
                                        of the utility programs.

Table 2: RUS’ Total Costs for Utility
Loans, Fiscal Years 1992-96             Dollars in millions
                                                                                                     Administrative
                                        Program                                Subsidy costs                costsa              Total costsb
                                        Electricity                                    $ 446.2                 $105.1                 $ 551.3
                                        Telecommunicationsc                              108.3                    82.0                  190.3
                                        Water and waste disposal                         544.7                  154.9                   699.7
                                        Totalb                                        $1,099.2                 $342.1                $1,441.3
                                        a
                                          RUS’ administrative costs apply to the operation of both direct and guaranteed loans. The
                                        amounts shown do not include any costs that the FFB or commercial lenders may have incurred.
                                        b
                                            Totals may not add due to rounding.
                                        c
                                            Includes the costs of Rural Telephone Bank loans.

                                        Sources: Obligation data on subsidy costs obtained from USDA, Budget Explanatory Notes for
                                        Committee on Appropriations, fiscal years 1994 through 1997, and the Budget Division of USDA’s
                                        Rural Development mission area. Administrative costs were obtained from the latter.



                                        About 54 percent of RUS’ total subsidy costs on electricity loans involved
                                        loans made in fiscal years 1992 and 1993; the remaining 46 percent
                                        involved loans made during fiscal years 1994 through 1996. On
                                        telecommunications loans, about 69 percent of the total subsidy costs
                                        involved loans made in the first 2 fiscal years, and 31 percent involved
                                        loans made in the last 3 fiscal years. On the other hand, about 31 percent
                                        of the total subsidy costs on water and waste disposal loans involved loans
                                        made in fiscal years 1992 and 1993, and 69 percent involved loans made in
                                        fiscal years 1994 through 1996.

                                        Almost 99 percent of RUS’ total subsidy costs involved direct loans. About
                                        59 percent of the electricity loans were direct loans made at a 5 percent
                                        interest rate; these loans accounted for about 42 percent of the total dollar
                                        amount of all electricity loans. About 24 percent of the
                                        telecommunications loans were direct loans made at a 5 percent interest

                                        4
                                         The Federal Credit Reform Act of 1990, which was included as Title 13B of the Omnibus Budget
                                        Reconciliation Act of 1990 (P.L. 101-508, Nov. 5, 1990) changed the way post-fiscal year 1991 credit
                                        programs are reported in the budget by ensuring that their subsidy costs were considered in making
                                        resource allocation decisions.



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                         rate; these loans accounted for about 27 percent of the total dollar amount
                         of all telecommunications loans. Also, about 91 percent of the water and
                         waste disposal loans were direct loans made at interest rates that were
                         less than RUS’ costs of borrowing from the Treasury; these loans accounted
                         for about 87 percent of the total dollar amount of all water and waste
                         disposal loans. (App. I discusses loans with subsidized interest rates.)

                         We did not assess the accuracy of RUS’ reported subsidy cost estimates or
                         the adequacy of the system used by RUS to derive such estimates under
                         credit reform. (App. I provides detailed information on the reported costs
                         for the direct and guaranteed loans in each of the utility loan programs for
                         fiscal years 1992 through 1996, and further discussion of subsidy costs.)


                         The outstanding principal on RUS’ direct and guaranteed electricity,
Financial Condition of   telecommunications, and water and waste disposal loans totaled $42.5
Portfolio                billion at the end of fiscal year 1996.5 About $660 million of the total
                         outstanding principal was owed by borrowers that were delinquent (at
                         least 30 days past due on loan repayment)—about $618 million by
                         delinquent borrowers with electricity loans and about $43 million by
                         delinquent borrowers with water and waste disposal loans. The
                         telecommunications loan portfolio had no delinquencies. Much more of
                         the outstanding electricity loan principal is at risk, however, because it is
                         owed by other borrowers that are experiencing financial distress; for
                         example, they are in bankruptcy or, according to RUS officials, are likely to
                         default on loan repayment in the near future. RUS’ records show that a total
                         principal of $7.4 billion was owed by such borrowers at the end of fiscal
                         year 1996. Four borrowers whose loans had previously been restructured
                         (the original loan agreements were altered, including revised repayment
                         schedules and changes in interest rates) and that continue to be in severe
                         financial trouble owe $5.7 billion; four other borrowers whose loans had
                         not previously been restructured and that are also in serious financial
                         difficulty owe $1.1 billion; and, one other borrower whose loans had
                         previously been restructured and that informed RUS in early fiscal year
                         1997 that it was experiencing financial difficulties owes $0.6 billion. Most
                         of the electricity loans to RUS’ problem borrowers were made many years
                         ago—some dating back to the late 1970s.



                         5
                          The information in this section of the report discusses the outstanding principal on the loans made or
                         guaranteed by RUS. We have not adjusted the outstanding loan amounts to reflect the allowance for
                         losses that RUS includes in its financial statements. Also, while borrowers have pledged collateral
                         property as security for the loans, we did not determine the extent to which such property protects the
                         government’s investments in the outstanding utility loans.



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                                         This relatively high dollar amount of problem loans exists even though RUS
                                         had written off some borrowers’ debts in recent years. Most of the
                                         write-offs have involved electricity loans, but some water and waste
                                         disposal loans have also experienced write-offs. Specifically, RUS wrote off
                                         almost $1.05 billion in electricity loans during the 5-year period, fiscal
                                         years 1992-96. It also wrote off $6 million in water and waste disposal
                                         loans during this period.


Electricity Loans                        According to RUS’ reports, about $8 billion, or almost 25 percent of the
                                         $32.3 billion in outstanding principal on electricity loans as of
                                         September 30, 1996, was owed by 12 borrowers that are delinquent or in
                                         financial distress. These 12 borrowers made up less than 2 percent of the
                                         total number of RUS’ electricity loan borrowers.

                                         About $618 million of principal was owed by three delinquent borrowers.
                                         These three borrowers, each of which had been delinquent since the
                                         mid-1980s, also owed almost $400 million in unpaid interest. Table 3 shows
                                         the amount of principal owed by all borrowers, and the portion owed by
                                         delinquent borrowers, on electricity loans at the end of fiscal year 1996.
                                         (App. II provides information on electricity loans at the end of fiscal years
                                         1992 through 1995.)

Table 3: Amount of Outstanding
Principal on Electricity Loans Made or   Dollars in millions
Guaranteed by RUS, and Portion Owed                                               Outstanding principal                   Amount owed by
by Delinquent Borrowers, as of           Loan type                                owed by all borrowers              delinquent borrowers
September 30, 1996
                                         RUS’ direct loans                                        $11,475.2                             $ 29.6
                                         Guaranteed FFB loans                                      13,328.6                              572.0
                                         Other guaranteed loans                                        664.7                               16.3
                                         Restructured loansa                                         6,841.1                                    0
                                         Total                                                    $32,309.6                             $617.9
                                         a
                                           Includes previously issued (1) direct loans made by RUS, (2) guaranteed loans made by the
                                         FFB, (3) guaranteed loans made by commercial lenders on which RUS agreed to be directly
                                         liable for repaying the loan, and (4) loans that had been owed by borrowers now assumed by
                                         other utilities. The amounts cover the principal and the capitalized interest owed on the loans. The
                                         loans in this category are not included in the other direct and guaranteed loan categories.

                                         Source: RUS’ reports.



                                         Each of the three delinquent borrowers has filed for bankruptcy.
                                         According to RUS officials, two of the borrowers (a distribution borrower
                                         and a power supply borrower) have problems that stem from investments



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in the same nuclear-generating plant, which resulted in high levels of debt
and debt-servicing expenses, coupled with a lack of growth in their
customer bases. At the end of fiscal year 1996, the distribution borrower
owed $15.1 million in outstanding principal and $4 million in unpaid
interest on RUS’ direct loans. The power supply borrower owed
$41.2 million in principal and $21.5 million in interest on RUS’ direct and
guaranteed loans. Both borrowers filed for bankruptcy in April 1996. The
third delinquent borrower has a high debt level because it invested in a
nuclear-generating plant that was not completed. This power supply
borrower, which owed $561.5 million in principal and $373.4 million in
interest on loans guaranteed by RUS, has been in bankruptcy since 1985.

In addition to delinquent borrowers, the electricity loan program had other
problem borrowers at the end of fiscal year 1996. These include four
power supply borrowers that previously had their debts restructured and
that continued, according to RUS officials, to be in severe financial trouble.
According to the RUS officials, these borrowers’ problems stem from their
investments in nuclear-generating plants that were completed late and
over budget or in coal-fired generating plants that were built to satisfy
anticipated industrial growth that did not occur. These borrowers’ debts
had been restructured at least once in the 1980s or the early part of 1990.
Two of these borrowers had filed for bankruptcy: One, with $4.2 billion in
outstanding loans, filed in 1994, and the other, with $531 million in
outstanding loans, filed in 1996. The third borrower with $293 million of
debt was negotiating the resolution of its outstanding loans at the time of
our review. The fourth borrower, with more than $700 million in
outstanding loan principal and about $36 million in accrued interest, had
agreed in late 1995 to provide a lump-sum payment to settle its electricity
debt. (In mid-October 1996, this borrower paid RUS about $240 million, and
RUS forgave slightly more than $500 million.)


Furthermore, according to RUS officials, four other power supply
borrowers, none of which have had their debts restructured, were also in
serious financial difficulty at the end of fiscal year 1996. RUS’ automated
records show that, as of September 30, 1996, these four borrowers owed a
total principal of about $1.1 billion on direct and guaranteed electricity
loans.

RUS officials also told us that another power supply borrower, which had
had its debts restructured in the mid-1980s, had requested in October 1996
that RUS consider renegotiating its debt because it does not expect to
remain financially viable due to increasing competition and a high



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                           debt-service expense. As of September 30, 1996, this borrower owed
                           $562.3 million of principal on direct and guaranteed loans.

                           RUS continues to experience problems with its electricity loan portfolio
                           even though it wrote off $1,047.4 million for three borrowers from fiscal
                           years 1992 through 1996. These three borrowers had had their debts
                           restructured prior to the agreements that resulted in the RUS write-offs;
                           none was delinquent on the terms of the restructured loans when the debt
                           settlement agreements were completed. These three borrowers were a
                           distribution borrower that had $13.7 million written off in February 1994, a
                           power supply borrower that had $51.7 million written off in August 1995,
                           and another power supply borrower that had about $982 million written
                           off in September 1996.

                           RUS’ electricity loan portfolio faces the possibility of additional financial
                           stress due to increasing competition among the providers of electricity.
                           For example, as we previously reported,6 competition in the wholesale
                           electricity market is increasing as a result of legislation that was enacted
                           in the early 1990s, such as the Energy Policy Act of 1992 (P.L. 102-486,
                           Oct. 24, 1992). The act encouraged additional wholesale suppliers to enter
                           the electricity market and provided greater access to other utilities’
                           transmission lines.


Telecommunications Loans   According to RUS’ reports, the outstanding principal owed on
                           telecommunications loans totaled $5.2 billion as of September 30, 1996. Of
                           this amount, RUS’ direct loans accounted for $3.4 billion, loans guaranteed
                           by RUS accounted for $320 million ($318 million on FFB loans and $2 million
                           on non-FFB loans), and RTB’s direct loans accounted for $1.5 billion. (App.
                           II provides information on telecommunications loans at the end of fiscal
                           years 1992 through 1995.)

                           RUS’ telecommunications loan program does not display the level of risk
                           that exists in the electricity loan program or, to a lesser extent in the water
                           and waste disposal loan program. Specifically, there were no
                           delinquencies on these loans.7 In addition, the RUS telecommunications

                           6
                            Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities
                           (GAO/AIMD-96-145, Sept. 19, 1996) and Federal Electric Power: Operating and Financial Status of
                           DOE’s Power Marketing Administrations (GAO/RCED/AIMD-96-9FS, Oct. 13, 1995).
                           7
                            We do not include as delinquent those telecommunications loan borrowers that are shown in RUS’
                           reports as being past due on repayments when the delinquency was due to billing, payment, or
                           administrative errors and when the past due amount was paid shortly after the start of the next fiscal
                           year.



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                           loan portfolio has no loans that have been restructured because of past
                           repayment problems or that had been flagged by the agency’s officials as
                           being in serious financial difficulty. Furthermore, RUS did not write off the
                           debt of any telecommunications loan borrowers during fiscal years 1992
                           through 1996.

                           However, the industry in which RUS’ telecommunications loan borrowers
                           operate is changing. In particular, as we previously reported,8 there have
                           been rapid advances in technology and changes in the legislative
                           environment, such as the Telecommunications Act of 1996 (P.L. 104-104,
                           Feb. 8, 1996). These factors could work to either the betterment or the
                           detriment of the borrowers that have telecommunications loans.


Water and Waste Disposal   According to RUS’ reports, less than 1 percent of the outstanding principal
Loans                      on water and waste disposal loans was owed by borrowers that were
                           delinquent. Specifically, the outstanding principal on water and waste
                           disposal loans totaled slightly more than $5 billion as of September 30,
                           1996; direct loans accounted for all but about $8 million of this amount. On
                           the direct loans, 70 delinquent borrowers owed $43.3 million at the end of
                           fiscal year 1996. These 70 borrowers made up less than 1 percent of the
                           total number of water and waste disposal direct loan borrowers. On
                           guaranteed loans, there were no delinquencies. (App. II provides
                           information on water and waste disposal loans at the end of fiscal years
                           1992 through 1995.)

                           When borrowers have had problems repaying their water and waste
                           disposal loans on schedule, RUS has changed their repayment schedules.
                           During fiscal years 1992 through 1996, 33 borrowers had their repayment
                           schedules revised; these borrowers owed RUS $54.1 million at the end of
                           fiscal year 1996. There was no debt forgiveness associated with these
                           payment changes.

                           RUS has, however, provided debt relief to other problem borrowers. During
                           fiscal years 1992 through 1996, RUS forgave slightly more than $6 million in
                           settling the accounts of 12 water and waste disposal loan borrowers.
                           These write-offs ranged from slightly less than $6,000 for a borrower
                           whose debt was resolved through bankruptcy to $3.1 million for a local
                           development authority following the transfer of its assets and debts to
                           another public body.

                           8
                            Rural Development: Steps Toward Realizing the Potential of Telecommunications Technologies
                           (GAO/RCED-96-155, June 14, 1996) and Telecommunications: Initiatives Taken by Three States to
                           Promote Increased Access and Investment (GAO/RCED-96-68, Mar. 12, 1996).



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                       While the majority of borrowers with electricity or telecommunications
Financial              loans had generally favorable financial characteristics, some did not.
Characteristics of     Specifically, RUS has automated records that contain the financial data
RUS’ Electricity and   submitted by about 96 percent of its 1,778 electricity and
                       telecommunications loan borrowers at the end of 1995.9 While the
Telecommunications     overwhelming majority of borrowers had positive equity at the end of
Borrowers              1995, 13 borrowers, or about 1 percent, had negative equity. Also, while
                       most had a profit as a result of 1995 operations, 52 borrowers, or
                       3 percent, had a loss.10 Furthermore, 14 of the 52 borrowers that had
                       losses in 1995 also had losses in at least 1 year between 1992 and 1994.


Electricity Loans      RUS’ automated files contained financial information for 804 distribution
                       borrowers and 51 power supply borrowers with outstanding electricity
                       loans (direct and/or guaranteed loans) at the end of 1995. On the basis of
                       the measures we used, which included net worth and net income, we
                       found that even though the dollar amount of problem electricity loans was
                       relatively large, most, but not all, electricity loan borrowers had generally
                       favorable financial characteristics. For example, the distribution
                       borrowers had average assets of $37.4 million, liabilities of $21.6 million,
                       and a net worth of $15.8 million. All but five of these borrowers had
                       $1 million or more of net worth; however, two had a negative net worth.
                       These two borrowers owed about $32 million on their outstanding
                       electricity loans as of September 30, 1996. In comparison, power supply
                       borrowers had average assets of $633 million, liabilities of $622.1 million,
                       and a net worth of $10.9 million. Of the power suppliers, 42 had $1 million
                       or more of net worth, but 8 had a negative net worth. Seven of these 8
                       borrowers owed about $6.1 billion on their outstanding electricity loans as
                       of September 30, 1996. The electricity loans of the eighth borrower were
                       settled on September 13, 1996, when the borrower made a partial payment
                       and RUS wrote off the remaining debt.

                       Another financial characteristic of the borrowers with electricity loans is
                       the net income they made in 1995. The distribution borrowers had average
                       operating revenues of $18.9 million, operating expenses of $17.2 million,
                       and a net operating income of $1.7 million. Overall, they had a total profit
                       of $1 billion, or about $1.3 million on average. All but 34, or 4.2 percent, of

                       9
                        The information presented in this section of the report on borrowers’ financial characteristics is
                       calendar year data taken from RUS’ databases. While RUS’ files contain financial information on the
                       majority of its borrowers, they did not include financial data for the year ending 1995 for 4 of the 12
                       electricity loan borrowers that were delinquent or experiencing financial difficulty.
                       10
                        RUS refers to the profits made by electricity and telecommunications loan borrowers that are
                       nonprofit cooperatives as “net margins” and to the losses as “deficits in net margins.”



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these borrowers had a profit in 1995. The 34 borrowers that had a loss
owed $359 million on their outstanding electricity loans as of
September 30, 1996. Furthermore, 10 of these 34 borrowers had losses in
at least 1 year between 1992 and 1994. In comparison, the power suppliers
had average operating revenues of $190.3 million, operating expenses of
$161.5 million, and a net operating income of $28.8 million. Overall, the
power suppliers had $234 million in total profit, or about $4.6 million on
average. However, four borrowers, or 7.8 percent, did not have a profit in
1995. These four borrowers owed $866 million on their outstanding
electricity loans as of September 30, 1996. Furthermore, two of these four
borrowers had losses in at least 1 year between 1992 and 1994.

Our analysis also showed that, in general, the majority of electricity loan
borrowers had other favorable financial ratios. This part of our analysis
covered the following measures, which are also discussed below: current
ratio, which is a measure of liquidity, and debt-to-asset ratio and
times-interest-earned ratio, which are measures of solvency.

Current ratio. This measure shows the extent to which a borrower has
sufficient current assets to cover its current liabilities. About 88 percent of
the distribution borrowers and 94 percent of the power supply borrowers
had current assets that equaled or exceeded their current liabilities.
However, 100 distribution borrowers and 3 power suppliers had current
ratios of less than 1, indicating that they could not, if necessary, cover
their current liabilities with their current assets.

Debt-to-asset ratio. This measure shows the extent to which a borrower
has sufficient assets to cover all of its debt. About 93 percent of the
distribution borrowers and about 22 percent of the power supply
borrowers had ratios in the range of 70 percent or less. However, 51
distribution borrowers and 32 power suppliers had ratios of between
71 percent and 99 percent. Furthermore, two distribution borrowers and
eight power suppliers had ratios that exceeded 100 percent, showing that
their total debt was greater than their total assets.

Times-interest-earned ratio. This measure shows the ability of a borrower
to pay its annual interest expenses. About 96 percent of the distribution
borrowers and about 92 percent of the power supply borrowers had 1995
income that equaled or exceeded their 1995 interest expenses. However,
the income of 34 distribution borrowers and of 4 power suppliers was less
than their 1995 interest expenses, indicating that their ability to cover
those expenses as they come due was questionable.



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                           The financial characteristics of electricity loan borrowers at the end of
                           1992 through 1994 show results similar to the characteristics at the end of
                           1995. (App. III provides a more detailed analysis of the borrowers’
                           characteristics for 1992 through 1995.)


Telecommunications Loans   RUS’ automated files contained financial information for 848 borrowers
                           with outstanding telecommunications loans (direct and/or guaranteed
                           loans) at the end of 1995. On the basis of the measures we used, including
                           net worth and net income, we found that the vast majority, but not all, of
                           these borrowers also had generally favorable financial characteristics. For
                           example, these borrowers had average assets of $17.7 million, liabilities of
                           $9.3 million, and a net worth of $8.4 million. Almost 91 percent of them
                           had a net worth of $1 million or more. However, three borrowers had total
                           liabilities that exceeded their total assets. These three borrowers owed
                           $5.4 million on their outstanding telecommunications loans as of
                           September 30, 1996. RUS officials told us that these three borrowers had
                           received loans during 1992 and 1993 to start their telecommunications
                           operations or to rebuild their systems. RUS officials also told us that they
                           anticipate that these borrowers will achieve a positive equity position in
                           late 1997 and 1998 once construction is completed and service to
                           customers is provided.

                           Another financial characteristic of the borrowers with
                           telecommunications loans is the net income they made in 1995. The
                           telecommunications loan borrowers had average operating revenues of
                           $6 million, operating expenses of $4.6 million, and a net operating income
                           of $1.4 million. Overall, they had a total profit of $772.6 million and an
                           average profit of slightly more than $910,000. Twenty-nine percent of the
                           borrowers made more than $1 million in profit in 1995; these borrowers
                           accounted for 92.5 percent of the total profit. However, 14 borrowers had
                           a loss in 1995. These 14 borrowers owed $103 million on their outstanding
                           telecommunications loans as of September 30, 1996. Furthermore, 2 of
                           these 14 borrowers had losses in at least 1 year between 1992 and 1994.

                           Our analysis also showed that, in general, the majority of
                           telecommunications loan borrowers had other favorable financial ratios.
                           This part of our analysis covered the following measures that we
                           previously discussed for the electricity borrowers: current ratio,
                           debt-to-asset ratio, and times-interest-earned ratio.




                           Page 12                                       GAO/RCED-97-82 RUS’ Utility Loans
                  B-275588




                  Current ratio. About 91 percent of the borrowers had current assets that
                  equaled or exceeded current liabilities. However, 73 borrowers had
                  current ratios of less than 1, indicating that they could not, if necessary,
                  cover their current liabilities with their current assets.

                  Debt-to-asset ratio. About 88 percent of the borrowers had ratios of
                  70 percent or less. However, 98 borrowers had ratios of between
                  71 percent and 99 percent, and 3 borrowers had ratios that exceeded
                  100 percent.

                  Times-interest-earned ratio. About 98 percent of the borrowers had
                  income that equaled or exceeded their interest expenses. However, the
                  income of 14 borrowers was less than their interest expenses.

                  As was the case with the electricity loan borrowers, our analysis of the
                  financial characteristics of telecommunications loan borrowers at the end
                  of 1992 through 1994 shows results similar to those at the end of 1995.
                  (App. III also provides a more detailed analysis on the characteristics of
                  the telecommunications loan borrowers for 1992 through 1995.)


                  We provided a draft of this report to USDA for its review and comment.
Agency Comments   USDA provided comments on two areas. First, USDA agreed that RUS has a
                  significant problem with a small number of electricity loan borrowers that
                  are experiencing financial difficulty. USDA stated that much of the problem
                  relates to loans that were made to borrowers many years ago for
                  investments involving nuclear power-generating plants and related
                  transmission facilities. USDA added that RUS and the Department have been
                  working, in some cases in conjunction with the Department of Justice, in
                  an attempt to resolve the agency’s problems. Second, USDA stated that the
                  Rural Electrification Loan Restructuring Act of 1993 (P.L. 103-129, Nov. 1,
                  1993) significantly amended the RUS electricity and telecommunications
                  programs and dramatically reduced their cost to the government. USDA
                  provided a comparison of the total dollar amounts of subsidy costs and
                  loan levels shortly before and after passage of the law. USDA’s comments
                  are contained in appendix IV.


                  We performed our review of RUS’ utility loan programs from April 1996
                  through February 1997 in accordance with generally accepted government
                  auditing standards. Our scope and methodology are discussed in appendix
                  V.



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We are sending copies of this report to the appropriate Senate and House
committees; interested Members of Congress; the Secretary of Agriculture;
the Administrator of RUS; the Director, Office of Management and Budget;
and other interested parties. We will also make copies available to others
upon request.

Please call me at (202) 512-5138 if you or your staff have any questions.
Major contributors to this report are listed in appendix VI.

Sincerely yours,




Robert A. Robinson
Director, Food and
  Agriculture Issues




Page 14                                        GAO/RCED-97-82 RUS’ Utility Loans
Page 15   GAO/RCED-97-82 RUS’ Utility Loans
Contents



Letter                                                                                               1


Appendix I                                                                                          20
                         Utility Loan Programs                                                      20
Description of RUS’      Loan Making and Servicing                                                  23
Utility Loan Programs    Loans Made and Guaranteed in RUS’ Utility Loan Programs                    24
                         RUS’ Costs for the Utility Loan Programs                                   28
                         Credit Reform                                                              30

Appendix II                                                                                         32

Financial Condition of
RUS’ Utility Loan
Portfolios
Appendix III                                                                                        35
                         Financial Characteristics of Borrowers With RUS’ Electricity and           35
Financial Information      Telecommunications Loans
on Borrowers With        Definitions of Financial Statistics for RUS’ Borrowers                     40
Electricity and
Telecommunications
Loans
Appendix IV                                                                                         42

Comments From the
U.S. Department of
Agriculture
Appendix V                                                                                          44

Objectives, Scope,
and Methodology
Appendix VI                                                                                         48

Major Contributors to
This Report



                         Page 16                                      GAO/RCED-97-82 RUS’ Utility Loans
         Contents




Tables   Table 1: Total Number and Amount of Utility Loans Made or                  3
           Guaranteed by RUS, Fiscal Years 1992-96
         Table 2: RUS’ Total Costs for Utility Loans, Fiscal Years 1992-96          4
         Table 3: Amount of Outstanding Principal on Electricity Loans              6
           Made or Guaranteed by RUS, and Portion Owed by Delinquent
           Borrowers, as of September 30, 1996
         Table I.1: Number of Utility Loans Made or Guaranteed by RUS,             25
           Fiscal Years 1992-96
         Table I.2: Total Dollar Amount of Utility Loans Made or                   26
           Guaranteed by RUS, Fiscal Years 1992-96
         Table I.3: Average Dollar Amount of Utility Loans Made or                 27
           Guaranteed by RUS, Fiscal Years 1992-96
         Table I.4: RUS’ Subsidy Costs for Utility Loans, Fiscal Years             29
           1992-96
         Table I.5: RUS’ Administrative Costs for the Utility Loan                 30
           Programs, Fiscal Years 1992-96
         Table I.6: RUS’ Total Costs for the Utility Loan Programs, Fiscal         30
           Years 1992-96
         Table II.1: Amount of Outstanding Principal Owed on Electricity           33
           Loans Made or Guaranteed by RUS, and Portion Owed by
           Delinquent Borrowers, September 30, 1992, Through
           September 30, 1996
         Table II.2: Amount of Outstanding Principal Owed on                       34
           Telecommunications Loans Made or Guaranteed by RUS,
           September 30, 1992, Through September 30, 1996
         Table II.3: Amount of Outstanding Principal Owed on Water and             34
           Waste Disposal Loans Made or Guaranteed by RUS, and Portion
           Owed by Delinquent Borrowers, September 30, 1992, Through
           September 30, 1996
         Table III.1: Number and Percentage of RUS’ Electricity Loan               36
           Distribution Borrowers, by Range of Net Worth, December 31,
           1992, Through December 31, 1995
         Table III.2: Number and Percentage of RUS’ Electricity Loan               36
           Distribution Borrowers, by Range of Profit, December 31, 1992,
           Through December 31, 1995
         Table III.3: Number and Percentage of RUS’ Electricity Loan               37
           Distribution Borrowers, by Range of Three Ratio Measures,
           December 31, 1992, Through December 31, 1995
         Table III.4: Number and Percentage of RUS’ Electricity Loan               37
           Power Supply Borrowers, by Range of Net Worth, December 31,
           1992, Through December 31, 1995




         Page 17                                     GAO/RCED-97-82 RUS’ Utility Loans
Contents




Table III.5: Number and Percentage of RUS’ Electricity Loan                38
  Power Supply Borrowers, by Range of Profit, December 31, 1992,
  Through December 31, 1995
Table III.6: Number and Percentage of RUS’ Electricity Loan                38
  Power Supply Borrowers, by Range of Three Ratio Measures,
  December 31, 1992, Through December 31, 1995
Table III.7: Number and Percentage of RUS’ Telecommunications              39
  Loan Borrowers, by Range of Net Worth, December 31, 1992,
  Through December 31, 1995
Table III.8: Number and Percentage of RUS’ Telecommunications              39
  Loan Borrowers, by Range of Profit, December 31, 1992, Through
  December 31, 1995
Table III.9: Number and Percentage of RUS’ Telecommunications              40
  Loan Borrowers, by Range of Three Ratio Measures,
  December 31, 1992, Through December 31, 1995




Abbreviations

FFB        Federal Financing Bank
GAO        General Accounting Office
RDA        Rural Development Administration
REA        Rural Electrification Administration
RTB        Rural Telephone Bank
RUS        Rural Utilities Service
USDA       U.S. Department of Agriculture


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Appendix I

Description of RUS’ Utility Loan Programs


                            The Rural Utilities Service (RUS), established by the Federal Crop
                            Insurance Reform and Department of Agriculture Reorganization Act of
                            1994 (P.L. 103-354, Oct. 13, 1994), administers the electricity and
                            telecommunications programs that were operated by the former Rural
                            Electrification Administration (REA) and the water and waste disposal
                            programs that were operated by the former Rural Development
                            Administration (RDA). Within USDA, RUS is located in the Rural Development
                            mission area. The Rural Electrification Act of 1936, as amended (7 U.S.C.
                            901 et seq.), provides the basic statutory authority for the electricity and
                            telecommunications programs, including the authority for guaranteed
                            loans to be made by the Federal Financing Bank (FFB) of the Treasury. The
                            Consolidated Farm and Rural Development Act, as amended (7 U.S.C.
                            1921 et seq.), contains the authority for the water and waste disposal
                            programs.

                            This appendix provides information on the different loans within the
                            utility loan programs and on the differences in procedures for making and
                            servicing loans. Information is also provided on the number and dollar
                            amount of loans that RUS made or guaranteed during fiscal years 1992
                            through 1996 and on RUS’ subsidy and administrative costs for operating
                            the utility loan programs during those years. Finally, this appendix
                            describes the credit reform procedures in the Federal Credit Reform Act
                            of 1990.


                            The following is a general description of RUS’ utility loans.
Utility Loan Programs
                            Electricity loans. RUS makes direct loans primarily to construct and
                            maintain electricity distribution facilities that provide electricity to rural
                            users. RUS also places guarantees on loans made to finance the
                            construction, repair, and improvement of electricity generation and
                            transmission facilities. The following are the types of loans provided in the
                            electricity program:

                        •   Direct loans with a 5 percent interest rate. These loans, referred to as
                            hardship rate loans, are made to borrowers that serve financially
                            distressed rural areas.
                        •   Direct loans with an interest rate that is tied to an index of municipal
                            borrowing rates. These loans, referred to as municipal rate loans, have a
                            maximum interest rate of 7 percent when the borrower meets, at the time
                            of loan approval, either a consumer density test or both a rate disparity
                            test and a consumer income test. To meet the first test, the average



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    Appendix I
    Description of RUS’ Utility Loan Programs




    number of consumers per mile of line of the borrower’s total electric
    system has to be less than 5.5. For the rate disparity test, the borrower’s
    average revenue per kilowatt hour sold has to be more than the average
    revenue per kilowatt hour sold by all electric utilities in the state in which
    the borrower provides service. For the consumer income test, either the
    average per capita income of the residents receiving electric service from
    the borrower has to be less than the average per capita income of the
    residents of the state in which the borrower provides service or the
    median household income of the households receiving electric service
    from the borrower has to be less than the median household income of the
    households in the state. If these tests are not met, the interest rate may
    exceed 7 percent.
•   Guaranteed loans. RUS places a USDA repayment guarantee on loans made
    by the FFB; these loans have an interest rate that is the Treasury’s cost of
    money plus one-eighth of 1 percent. If the applicant selects the FFB as the
    lender, RUS is required to place a 100-percent guarantee on the loan. While
    RUS can also place a 100-percent USDA guarantee on electricity loans made
    by commercial lenders, it has not guaranteed any such loans in recent
    years because all applicants have applied for loans to be made by the FFB.

    Telecommunications loans. RUS’ direct and guaranteed loans are made
    primarily to build and improve telephone services and
    telecommunications facilities in rural areas, including loans for advanced
    telecommunications facilities and services such as fiber-optic cabling,
    digital-switching equipment, and educational television applications. RUS’
    telecommunications loans are the following:

•   Direct loans with a 5 percent interest rate. These loans, referred to as
    hardship rate loans, are made to borrowers that are financially stressed.
•   Direct loans with an interest rate that matches USDA’s cost of money. These
    loans are referred to as cost-of-money rate loans.
•   Guaranteed loans. RUS places a USDA repayment guarantee on loans made
    by the FFB, which have an interest rate that is the Treasury’s cost of money
    plus one-eighth of 1 percent. As with electricity loans, if an applicant
    selects the FFB as the lender, RUS is required to place a 100-percent
    guarantee on the loan. While RUS can also place a 100-percent USDA
    guarantee on telecommunications loans made by commercial lenders, it
    has not guaranteed any such loans in recent years because all applicants
    have applied for loans to be made by the FFB.

    Rural Telephone Bank loans. In administering the Rural Telephone Bank
    (RTB) loan program, RUS makes direct loans to telephone cooperatives and



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    Appendix I
    Description of RUS’ Utility Loan Programs




    commercial companies that receive RUS’ telecommunications loans. RTB
    loans, which have an interest rate that matches RTB’s cost of money, are
    made to extend and improve rural telephone services, including advanced
    telecommunications facilities and services.

    Water and waste disposal loans. RUS’ direct and guaranteed water loans are
    made to improve the storage, treatment, and distribution of water in rural
    areas. Similarly, RUS’ direct and guaranteed waste disposal loans are made
    to collect, treat, and dispose of waste, including loans for sewer systems,
    solid waste disposal, and storm drainage. Other than the purpose of the
    loan, there are no differences between RUS’ water and waste disposal
    loans. The loans fall into the following categories:

•   Direct loans with a 4.5 percent interest rate. These loans, referred to as
    poverty-rate loans, are made to borrowers that serve areas where the
    median household income is below the poverty line or is less than
    80 percent of a state’s nonmetropolitan median household income. To
    receive a loan with this interest rate, the borrower’s project has to address
    health or sanitary violations identified by the state’s health department.
    The maximum interest rate authorized on a poverty-rate loan is 5 percent.
•   Direct loans with an interest rate that is tied to an index of municipal
    tax-exempt bonds. These loans, referred to as market-rate loans, are made
    to borrowers that serve areas where the median household income
    exceeds a state’s nonmetropolitan median household income.
•   Direct loans with an interest rate that is one-half the difference between
    the rates on poverty- and market-rate loans. These loans, referred to as
    intermediate-rate loans, are made to borrowers that serve areas where the
    median household income is between 80 percent and 100 percent of a
    state’s nonmetropolitan median household income. Loans at this rate are
    also made to borrowers that serve areas where the median income is less
    than 80 percent of a state’s nonmetropolitan median household income
    but where the state’s health department has not identified a health or
    sanitary problem. The maximum interest rate authorized on an
    intermediate-rate loan is 7 percent.
•   Guaranteed loans. RUS places a USDA repayment guarantee on loans made
    by commercial lenders; these loans have an interest rate that is agreed
    upon by the lender and the borrower. While RUS can place a maximum
    guarantee of 90 percent on these loans, in most cases it has placed an
    80-percent guarantee.




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                  Appendix I
                  Description of RUS’ Utility Loan Programs




                  The Assistant Administrators for RUS’ electricity, telecommunications, and
Loan Making and   water and waste disposal programs provide direction and guidance on
Servicing         their respective programs for loan making and servicing. The Assistant
                  Administrators also review and approve certain loan applications.

                  Many loan-making and -servicing functions associated with electricity and
                  telecommunications loans are centralized at RUS’ headquarters. RUS’
                  regional offices in the electricity program and area offices in the
                  telecommunications program process loan applications, decide on the
                  technical aspects and the financial feasibility of the proposed projects, and
                  service approved loans. Also, the Power Supply Division in the electricity
                  program services those borrowers that have guaranteed loans for
                  electricity generation and transmission purposes. Staff assigned to the
                  regional and area offices and to the Power Supply Division are physically
                  located at RUS’ headquarters in Washington, D.C.

                  RUS also employs approximately 70 general field representatives who are
                  located throughout the country; about half of these work on the electricity
                  program and the other half on the telecommunications program. These
                  field representatives are an extension of the headquarters-based regional
                  and area office staff. For example, during the loan-making process, they
                  assist an applicant by, among other things, providing advice on the
                  application process and documentation requirements. During
                  loan-servicing, they monitor project construction. While most of their
                  oversight is performed by reviewing the documents that borrowers have
                  submitted, the field representatives also visit, at least once a year, project
                  sites to determine their status.

                  RUS also employs about 35 field accountants who conduct financial
                  reviews of electricity and telecommunications loan borrowers. Among
                  other things, these accountants perform fiscal reviews to determine if
                  funds are used properly and if adequate records of expenditures are
                  maintained.

                  In contrast, many loan-making and -servicing functions associated with
                  water and waste disposal loans are managed by staff physically located in
                  field offices. Specifically, staff in the Rural Development mission area who
                  are in state, district, or other field offices process water and waste
                  disposal loan applications, decide on the technical aspects and the
                  financial feasibility of the proposed projects, and service approved loans.




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                        Appendix I
                        Description of RUS’ Utility Loan Programs




                        The programs also differ in the servicing of guaranteed loans. Specifically,
                        RUS staff service the electricity and telecommunications loans made by the
                        FFB that have USDA guarantees. Servicing includes billings, loan payment
                        collections, and visits and contacts with borrowers. On the other hand,
                        commercial lenders service the guaranteed water and waste disposal loans
                        that they made. RUS periodically monitors the lenders to ensure that they
                        are servicing the accounts.


                        Tables I.1 through I.3 contain information on the number and dollar
Loans Made and          amount of loans that RUS made or guaranteed during fiscal years 1992
Guaranteed in RUS’      through 1996 on the various utility loan programs. For example, table I.1
Utility Loan Programs   shows that the overwhelming number of loans made each year in each of
                        the programs were direct loans. Table I.2 shows that approximately
                        $2 billion in loans was made in each year over the 5-year period. Table I.3
                        shows that the average amount of all guaranteed loans was far greater
                        than the average amount of all direct loans. All of the electricity and
                        telecommunications loans that RUS guaranteed during this 5-year period
                        were made by Treasury’s FFB; all RUS-guaranteed water and waste disposal
                        loans were made by commercial lenders.




                        Page 24                                       GAO/RCED-97-82 RUS’ Utility Loans
                                          Appendix I
                                          Description of RUS’ Utility Loan Programs




Table I.1: Number of Utility Loans Made or Guaranteed by RUS, Fiscal Years 1992-96
Program and loan type                 1992             1993            1994                     1995                1996               Total
Electricity
                                                                                 a                   a                   a
Direct standard rate                  193                256                                                                               449
                                          a                  a
Direct hardship rate                                                           29                  22                 23                   74
                                          a                  a
Direct municipal rate                                                        111                 105                  96                   312
Subtotal direct                       193                256                 140                 127                 119                   835
Guaranteed                              14                  3                   9                   8                 11                   45
Total                                 207                259                 149                 135                 130                   880
Telecommunications
                                                                                 a                   a                   a
Direct standard rate                    40                 43                                                                              83
                                          a                  a
Direct hardship rate                                                           18                   8                 12                   38
                                          a                  a
Direct cost-of-money rate                                                      50                  48                 44                   142
Subtotal direct                         40                 43                  68                  56                 56                   263
Guaranteed                               3                  7                  10                  12                   6                  38
Total                                   43                 50                  78                  68                 62                   301
Rural Telephone Bank
Direct                                  29                 38                  50                  48                 44                   209
Water and waste disposal
Direct poverty rate                   355                433                 412                 456                 431               2,087
Direct intermediate rate              378                422                 506                 511                 412               2,229
Direct market rate                    126                  72                  75                  85                 52                   410
Subtotal direct                       859                927                 993               1,052                 895               4,726
                                                                                                     b
Guaranteed                              12                  5                   8                                     13                   38
Total                                 871                932               1,001               1,052                 908               4,764
RUS total
Direct                               1,121             1,264               1,251               1,283               1,114               6,033
Guaranteed                              29                 15                  27                  20                 30                   121
Total                                1,150             1,279               1,278               1,303               1,144               6,154
                                          a
                                           USDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and
                                          were referred to as standard rate REA loans. USDA was authorized in a November 1993
                                          amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and
                                          cost-of-money rate loans starting in fiscal year 1994.
                                          b
                                           USDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water
                                          and waste disposal loans.

                                          Sources: USDA, Budget Explanatory Notes for Committee on Appropriations, fiscal years 1994
                                          through 1997, and RUS’ reports.




                                          Page 25                                                        GAO/RCED-97-82 RUS’ Utility Loans
                                             Appendix I
                                             Description of RUS’ Utility Loan Programs




Table I.2: Total Dollar Amount of Utility Loans Made or Guaranteed by RUS, Fiscal Years 1992-96
Dollars in millions
Program and loan type                 1992                 1993                1994                1995                1996               Total
Electricity
                                                                                    a                   a                   a
Direct standard rate                $622.1               $913.4                                                                       $1,535.5
                                          a                     a
Direct hardship rate                                                         $109.2              $ 74.1               $ 90.6              273.9
                                          a                     a
Direct municipal rate                                                         408.8               536.4               544.6             1,489.8
Subtotal direct                      622.1                913.4               518.0               610.5               635.2             3,299.1
Guaranteed                           182.8                113.3               269.8               300.0               187.3             1,053.3
Total                               $804.9             $1,026.7              $787.8              $910.5              $822.5           $4,352.4
Telecommunications
                                                                                    a                   a                   a
Direct standard rate                 204.5                311.0                                                                           515.5
                                          a                     a
Direct hardship rate                                                           70.3                48.1                71.2               189.6
                                          a                     a
Direct cost-of-money rate                                                     198.0               242.3               216.7               657.1
Subtotal direct                      204.5                311.0               268.3               290.5               287.9             1,362.3
Guaranteed                            35.2                  67.1               59.7               119.4                78.1               359.6
Total                               $239.7               $378.1              $328.1              $409.9              $366.0           $1,721.8
Rural Telephone Bank
Direct                               177.0                175.0               199.8               175.0               126.4               853.3
Water and waste disposal
Direct poverty rate                  217.9                319.6               282.6               328.2               291.5             1,439.8
Direct intermediate rate             261.9                268.6               372.0               411.4               272.6             1,586.4
Direct market rate                   120.2                  59.0               60.9                88.3                39.1               367.6
Subtotal direct                      600.0                647.1               715.5               827.9               603.2             3,393.8
                                                                                                        b
Guaranteed                             4.6                   1.7                 5.2                                   59.1                   70.5
Total                               $604.6               $648.8              $720.7              $827.9              $662.3           $3,464.3
RUS total
Direct                            $1,603.6             $2,046.5            $1,701.7           $1,903.9             $1,652.8           $8,908.4
Guaranteed                          $222.7               $182.1              $334.7              $419.4              $324.5           $1,483.3
Total                             $1,826.2             $2,228.6            $2,036.4           $2,323.3             $1,977.3          $10,391.8
                                             Note: Subtotals and totals may not add due to rounding.
                                          a
                                            USDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and
                                          were referred to as standard rate REA loans. USDA was authorized in a November 1993
                                          amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and
                                          cost-of-money rate loans starting in fiscal year 1994.
                                             b
                                              USDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water
                                             and waste disposal loans.

                                          Sources: USDA, Budget Explanatory Notes for Committee on Appropriations, fiscal years 1994
                                          through 1997, and RUS’ reports.




                                          Page 26                                                           GAO/RCED-97-82 RUS’ Utility Loans
                                          Appendix I
                                          Description of RUS’ Utility Loan Programs




Table I.3: Average Dollar Amount of Utility Loans Made or Guaranteed by RUS, Fiscal Years 1992-96
Dollars in millions
Program and loan type                1992               1993                1994                1995                1996 5-year average
Electricity
                                                                                 a                   a                   a
Direct standard rate                  $3.2               $3.6                                                                              $3.4
                                          a                  a
Direct hardship rate                                                         $3.8               $3.4                $3.9                    3.7
                                          a                  a
Direct municipal rate                                                         3.7                 5.1                 5.7                   4.8
All direct                             3.2                3.6                 3.7                 4.8                 5.3                   4.0
Guaranteed                            13.1               37.8                30.0               37.5                17.0                   23.4
Average for all electricity            3.9                4.0                 5.3                 6.7                 6.3                   4.9
Telecommunications
                                                                                 a                   a                   a
Direct standard rate                   5.1                7.2                                                                               6.2
                                          a                  a
Direct hardship rate                                                          3.9                 6.0                 5.9                   5.0
                                          a                  a
Direct cost-of-money rate                                                     4.0                 5.0                 4.9                   4.6
All direct                             5.1                7.2                 3.9                 5.2                 5.1                   5.2
Guaranteed                            11.7                9.6                 6.0               10.0                13.0                    9.5
Average for all                        5.6                7.6                 4.2                 6.0                 5.9                   5.7
telecommunications
Rural Telephone Bank
Direct                                 6.1                4.6                 4.0                 3.6                 2.9                   4.1
Water and waste disposal
Direct poverty rate                    0.6                0.7                 0.7                 0.7                 0.7                   0.7
Direct intermediate rate               0.7                0.6                 0.7                 0.8                 0.7                   0.7
Direct market rate                     1.0                0.8                 0.8                 1.0                 0.8                   0.9
All direct                             0.7                0.7                 0.7                 0.8                 0.7                   0.7
                                                                                                     b
Guaranteed                             0.4                0.3                 0.6                                     4.5                   1.9
Average for all water and
waste disposal                         0.7                0.7                 0.7                 0.8                 0.7                   0.7
All RUS loans
Average for all direct                 1.4                1.6                 1.4                 1.5                 1.5                   1.5
Average for all guaranteed             7.7               12.1                12.4               21.0                10.8                   12.3
Average for all loans                  1.6                1.7                 1.6                 1.8                 1.7                   1.7
                                          a
                                           USDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and
                                          were referred to as standard rate REA loans. USDA was authorized in a November 1993
                                          amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and
                                          cost-of-money rate loans starting in fiscal year 1994.
                                          b
                                           USDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water
                                          and waste disposal loans.

                                          Source: GAO’s calculation.




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                        Appendix I
                        Description of RUS’ Utility Loan Programs




                        Tables I.4 through I.6 contain information on RUS’ subsidy costs for making
RUS’ Costs for the      and guaranteeing utility program loans and its administrative costs for
Utility Loan Programs   operating the utility loan programs during fiscal years 1992 through 1996.
                        For example, table I.4 shows that the subsidy costs for direct loans in the
                        programs in each year were considerably higher than for guaranteed loans.
                        Table I.5 shows that RUS’ administrative costs for each program were fairly
                        consistent in each year—in the mid-$60 million to mid-$70 million range.
                        Table I.6 shows that RUS’ total costs were approximately $300 million in
                        each year.




                        Page 28                                      GAO/RCED-97-82 RUS’ Utility Loans
                                              Appendix I
                                              Description of RUS’ Utility Loan Programs




Table I.4: RUS’ Subsidy Costs for Utility Loans, Fiscal Years 1992-96
Dollars in millions
Program and loan type                  1992                 1993               1994                1995                1996                 Total
Electricity
                                                                                     a                  a                   a
Direct standard rate                 $117.1               $117.3                                                                           $234.4
                                           a                     a
Direct hardship rate                                                          $18.7                $ 9.7              $21.2                  49.6
                                           a                     a
Direct municipal rate                                                           46.0               46.0                56.9                 148.9
Subtotal direct                       117.1                117.3                64.7               55.7                78.1                 432.9
Guaranteed                              3.3                   5.3                3.1                   0                 1.6                 13.3
Total                                $120.4               $122.6              $67.8               $55.7               $79.7                $446.2
Telecommunications
                                                                                     a                  a                   a
Direct standard rate                   34.4                 36.3                                                                             70.7
                                           a                     a
Direct hardship rate                                                            11.3                 3.8               13.9                  29.0
Direct cost-of-money rate                  a                     a
                                                                               <0.1                  0.1               <0.1                   0.1
Subtotal direct                        34.4                 36.3                11.3                 3.9               13.9                  99.8
Guaranteed                                0                   0.1                  0                   0                  0                   0.1
Total                                 $34.4                $36.3              $11.3                $3.9               $13.9                 $99.9
Rural Telephone Bank
Direct                                  3.6                 <0.1                 0.8                 0.8                 3.2                  8.4
Water and waste disposal
Directb                                84.6                 82.1              115.8               126.5               135.7                 544.7
                                                                                                        c
Guaranteed                                0                     0                  0                                      0                    0
Total                                 $84.6                $82.1             $115.8              $126.5              $135.7                $544.7
RUS total
Direct                               $239.7               $235.8             $192.6              $186.9              $230.9           $1,085.9
Guaranteed                             $ 3.3                $ 5.4              $ 3.1                 $0                $ 1.6               $ 13.3
Total                                $243.0               $241.1             $195.7              $186.9              $232.5           $1,099.2
                                              Note: Totals may not add due to rounding.
                                           a
                                             USDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and
                                           were referred to as standard rate REA loans. USDA was authorized in a November 1993
                                           amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and
                                           cost-of-money rate loans starting in fiscal year 1994.
                                              b
                                               According to officials in the Budget Division of USDA’s Rural Development mission area, a
                                              breakout of the subsidy costs for the three types of direct water and waste disposal
                                              loans—poverty rate, intermediate rate, and market rate—is not available because the Budget
                                              Division’s subsidy cost records are not maintained by the type of loan.
                                           c
                                             USDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water
                                           and waste disposal loans.

                                           Sources: Obligation data obtained from USDA, Budget Explanatory Notes for Committee on
                                           Appropriations, fiscal years 1994 through 1997, and information provided to GAO by the Budget
                                           Division in USDA’s Rural Development mission area.




                                           Page 29                                                          GAO/RCED-97-82 RUS’ Utility Loans
                                              Appendix I
                                              Description of RUS’ Utility Loan Programs




Table I.5: RUS’ Administrative Costs for the Utility Loan Programs, Fiscal Years 1992-96
Dollars in millions
Program                                1992                 1993                1994                 1995                1996                Total
Electricity                           $20.8                $20.8                $21.2               $21.2               $21.2              $105.1
Telecommunications                       8.6                  8.6                 8.8                  8.8                 8.8                43.6
Rural Telephone Bank                     8.6                  8.6                 8.8                  8.8                 3.5                38.4
Water and waste disposal               26.8                  28.4                34.3                34.4                31.1               154.9
Total                                 $64.9                $66.5                $73.0               $73.1               $64.6              $342.1
                                              Note: RUS’ administrative costs apply to the operation of both direct and guaranteed loans in the
                                              various utility loan programs. The amounts shown do not include any administrative costs that
                                              Treasury’s FFB or commercial lenders may have incurred on RUS-guaranteed loans. Totals may
                                              not add due to rounding.

                                              Source: Information provided to GAO by the Budget Division in USDA’s Rural Development
                                              mission area.




Table I.6: RUS’ Total Costs for the Utility Loan Programs, Fiscal Years 1992-96
Dollars in millions
Program                                1992                 1993                1994                 1995                1996                Total
Electricity                          $141.1               $143.4               $ 89.0              $ 76.9              $100.9             $ 551.3
Telecommunications                     43.1                  45.0                20.1                12.7                22.7               143.5
Rural Telephone Bank                   12.3                   8.7                 9.6                  9.6                 6.7                46.8
Water and waste disposal              111.4                110.6                150.0               160.9               166.8               699.7
Total                                $307.9               $307.6              $268.7              $260.0               $297.1            $1,441.3
                                              Note: Totals may not add due to rounding.

                                              Source: GAO’s calculation.




                                              The two key principles of credit reform contained in the Federal Credit
Credit Reform                                 Reform Act of 1990 center on the (1) definition of cost in terms of the
                                              present value of the estimated cash flow over the life of a credit
                                              instrument and (2) inclusion in the budget of the costs of credit programs
                                              before direct or guaranteed loans are made or modified.

                                              Credit reform requirements separate the government’s cost of extending
                                              or guaranteeing credit, called the subsidy cost, from administrative and
                                              unsubsidized program costs. Administrative expenses receive separate
                                              appropriations. They are treated on a cash basis and reported separately in




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Appendix I
Description of RUS’ Utility Loan Programs




the budget. The unsubsidized portion of a direct loan or loan guarantee is
expected to be recovered from the borrower.

The Credit Reform Act defines the subsidy cost of direct loans as the
present value—over the loan’s life—of estimated disbursements by the
government (loan disbursements and other payments) minus estimated
payments to the government (repayments of principal, payments of
interest, and other payments) after adjusting for projected defaults,
prepayments, fees, penalties, and other recoveries. It defines the subsidy
cost of loan guarantees as the present value of cash flows from estimated
payments by the government (for defaults and delinquencies, interest rate
subsidies, and other payments) minus estimated payments to the
government (for loan origination and other fees, penalties, and
recoveries). Permanent, indefinite appropriations are available should the
appropriated subsidy cost be less than the estimates in a later fiscal year.

Before credit reform, credit programs—like other programs—were
reported in the budget on a cash basis. As a result, it was difficult to make
appropriate cost comparisons between direct loan and loan guarantee
programs and between credit and noncredit programs. Credit programs
had different economic effects than most budget outlays, such as the
purchase of goods and services, income transfers, and grants. In the case
of direct loans, for example, the fact that the loan recipient was obligated
to repay the government over time meant that the budgetary impact of a
direct loan disbursement could be much less than other budget
transactions of the same dollar amount. This lower budgetary impact also
created a bias in favor of loan guarantees over direct loans. Loan
guarantees appeared to be free, while direct loans appeared to be
expensive because the budget did not recognize that at least some of the
loan guarantees would default and that some of the direct loans would be
repaid.

The Credit Reform Act changed this treatment for direct loans and loan
guarantees made on or after October 1, 1991.




Page 31                                        GAO/RCED-97-82 RUS’ Utility Loans
Appendix II

Financial Condition of RUS’ Utility Loan
Portfolios

               This appendix contains information on the amount of outstanding
               principal owed on RUS’ electricity, telecommunications, and water and
               waste disposal loans, and the portions owed by delinquent borrowers, at
               the end of fiscal years 1992 through 1996. For example, table II.1 shows
               that the amount of outstanding principal owed on electricity loans
               declined by about $2.1 billion, or 6.2 percent, from the end of fiscal year
               1992 to the end of fiscal year 1996. Table II.2 shows that the amount of
               outstanding principal owed on telecommunications loans declined by
               about $168 million, or 3.1 percent, over the same period. On the other
               hand, table II.3 shows that the outstanding principal owed on water and
               waste loans increased by about $1.5 billion, or 40.6 percent, over this
               period.




               Page 32                                        GAO/RCED-97-82 RUS’ Utility Loans
                                         Appendix II
                                         Financial Condition of RUS’ Utility Loan
                                         Portfolios




Table II.1: Amount of Outstanding Principal Owed on Electricity Loans Made or Guaranteed by RUS, and Portion Owed by
Delinquent Borrowers, September 30, 1992, Through September 30, 1996
Dollars in millions
Loan type                                 1992                     1993                   1994                    1995                    1996
RUS’ direct loans
Outstanding principal owed by        $11,978.4              $11,855.8               $11,771.3               $11,894.8               $11,475.2
all borrowers
Outstanding principal owed by              92.2                    92.2                   29.6                     29.6                    29.6
delinquent borrowers
Guaranteed FFB loans
Outstanding principal owed by          14,676.6              14,249.3                13,789.1                 13,780.4                13,328.6
all borrowers
Outstanding principal owed by            765.5                    739.0                  591.6                   584.5                   572.0
delinquent borrowers
Other guaranteed loans
Outstanding principal owed by            755.4                    936.8                  702.6                   685.2                   664.7
all borrowers
Outstanding principal owed by                 0                    16.9                   16.7                     16.5                    16.3
delinquent borrowers
Restructured loansa
Outstanding principal owed by           7,027.3                  7,179.8               8,172.0                 8,008.3                 6,841.1
all borrowers
Outstanding principal owed by                 0                       0                       0                       0                         0
delinquent borrowers
Total loans
Outstanding principal owed           $34,437.7              $34,221.7               $34,435.0               $34,368.7               $32,309.6
by all borrowers
Outstanding principal owed              $857.7                   $848.1                 $637.9                  $630.6                  $617.9
by delinquent borrowers
                                         Note: The information in this table, and in tables II.2 and II.3, covers outstanding principal on
                                         loans made or guaranteed by RUS. We have not adjusted the outstanding loan amounts to reflect
                                         the allowance for losses that RUS includes in its financial statements or the adequacy of reserves
                                         on the loans.
                                         a
                                           Includes previously issued (1) direct loans made by RUS, (2) guaranteed loans made by the
                                         FFB, (3) guaranteed loans made by commercial lenders on which RUS agreed to be directly
                                         liable for repaying the loan, and (4) loans that had been owed by borrowers now assumed by
                                         other utilities. The amounts cover the principal and the capitalized interest owed on the loans. The
                                         loans in this category are not included in the other direct and guaranteed loan categories.

                                         Source: RUS’ reports.




                                         Page 33                                                        GAO/RCED-97-82 RUS’ Utility Loans
                                        Appendix II
                                        Financial Condition of RUS’ Utility Loan
                                        Portfolios




Table II.2: Amount of Outstanding Principal Owed on Telecommunications Loans Made or Guaranteed by RUS,
September 30, 1992, Through September 30, 1996
Dollars in millions
Loan type                                1992                     1993                  1994                   1995                    1996
RUS’ direct loans                     $3,251.9              $3,306.5               $3,320.2                $3,369.0                $3,360.9
Guaranteed FFB loans                     352.1                   340.8                 297.0                  304.3                   318.4
Other guaranteed loans                     2.4                      2.3                   2.2                    2.1                     1.9
RTB’s direct loans                     1,727.3                  1,733.9              1,543.0                1,531.7                 1,484.9
Total loans                           $5,333.7              $5,383.5               $5,162.4                $5,207.1                $5,166.1
                                        Note: There were no delinquent telecommunications loans at the end of fiscal years 1992 through
                                        1996. We do not include as delinquent those borrowers that are shown in RUS’ reports as being
                                        past due on repayments at the end of the fiscal years when the delinquency was due to billing,
                                        payment, or administrative errors and when the past due amount was paid shortly after the start of
                                        the next fiscal year.

                                        Source: RUS’ reports.




Table II.3: Amount of Outstanding Principal Owed on Water and Waste Disposal Loans Made or Guaranteed by RUS, and
Portion Owed by Delinquent Borrowers, September 30, 1992, Through September 30, 1996
Dollars in millions
Loan type                                1992                     1993                  1994                   1995                    1996
Direct loans
Outstanding principal owed by         $3,580.1              $3,848.5               $4,113.0                $4,511.5                $5,024.9
all borrowers
Outstanding principal owed by             53.7                    29.6                  50.5                    39.5                   43.3
delinquent borrowers
Guaranteed loans
Outstanding principal owed by                0                      0.9                   4.7                    7.1                     7.9
all borrowers
Outstanding principal owed by                0                       0                      0                      0                         0
delinquent borrowers
Total loans
Outstanding principal owed            $3,580.1              $3,849.4               $4,117.7                $4,518.6                $5,032.8
by all borrowers
Outstanding principal owed               $53.7                   $29.6                 $50.5                  $39.5                   $43.3
by delinquent borrowers
                                        Source: RUS’ reports.




                                        Page 34                                                      GAO/RCED-97-82 RUS’ Utility Loans
Appendix III

Financial Information on Borrowers With
Electricity and Telecommunications Loans

                      This appendix contains information on the financial characteristics of
                      borrowers that had RUS’ electricity and telecommunications loans and that
                      reported financial information to RUS as of the end of calendar years 1992
                      through 1995.1 A glossary is also provided that defines the financial
                      measures used to describe these borrowers.


                      Tables III.1 through III.9 provide information describing the financial
Financial             characteristics of electricity and telecommunications loan borrowers that
Characteristics of    reported to RUS. The first three tables provide information on the
Borrowers With RUS’   distribution borrowers with electricity loans. The second set of three
                      tables provides information on the power supply borrowers with
Electricity and       electricity loans. The last three tables provide information on borrowers
Telecommunications    with telecommunications loans.
Loans                 Tables III.1, III.4, and III.7 show that the overwhelming majority of the
                      borrowers had a net worth of $1 million or more at the end of each year
                      from 1992 through 1995. Tables III.2, III.5, and III.8 show that most of them
                      had profits of at least $100,000 in each of these years. Tables III.3, III.6, and
                      III.9 show that the current ratios, debt-to-asset ratios, and
                      times-interest-earned ratios of the borrowers were generally favorable in
                      each year.




                      1
                       The information presented in this appendix was taken from RUS’ databases. The information we
                      present covers more borrowers than are covered in RUS’ annual statistical reports on borrowers,
                      which exclude, for example, borrowers that submitted information to the agency after the submission
                      date for publishing the annual reports. However, the information submitted after that date is
                      maintained in the agency’s databases.



                      Page 35                                                      GAO/RCED-97-82 RUS’ Utility Loans
                                           Appendix III
                                           Financial Information on Borrowers With
                                           Electricity and Telecommunications Loans




Table III.1: Number and Percentage of RUS’ Electricity Loan Distribution Borrowers, by Range of Net Worth, December 31,
1992, Through December 31, 1995
                                     1992                     1993                     1994                    1995
Range of net worth             Number   Percentage         Number      Percentage      Number    Percentage       Number       Percentage
$100 million or more                2               0.2            7             0.8         7             0.8            9                1.1
$10 million to $99.9 million      403              46.7         421             49.2      432             51.9         431                53.6
$1 million to $9.9 million        447              51.8         419             49.0      385             46.3         359                44.7
$100,000 to $999,999                7               0.8            4             0.5         4             0.5            2                0.2
$0 to $99,999                       1               0.1            1             0.1         1             0.1            1                0.1
Less than $0                        3               0.3            3             0.4         3             0.4            2                0.2
Total                             863            100.0a         855            100.0      832           100.0          804            100.0a
                                           a
                                               Does not add due to rounding.

                                           Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                           by electricity loan borrowers.




Table III.2: Number and Percentage of RUS’ Electricity Loan Distribution Borrowers, by Range of Profit, December 31, 1992,
Through December 31, 1995
                                     1992                     1993                     1994                    1995
Range of profit                Number   Percentage         Number      Percentage      Number    Percentage       Number       Percentage
$10 million or more                 4               0.5            6             0.7         4             0.5            4                0.5
$1 million to $9.9 million        290              33.6         360             42.1      304             36.5         303                37.7
$100,000 to $999,999              512              59.3         459             53.7      478             57.5         438                54.5
$0 to $99,999                      36               4.2          20              2.3        26             3.1           25                3.1
Less than $0                       21               2.4          10              1.2        20             2.4           34                4.2
Total                             863            100.0          855            100.0      832           100.0          804            100.0

                                           Source: GAO’s analysis of RUS’ automated database containing financial information submitted by
                                           electricity loan borrowers.




                                           Page 36                                                    GAO/RCED-97-82 RUS’ Utility Loans
                                          Appendix III
                                          Financial Information on Borrowers With
                                          Electricity and Telecommunications Loans




Table III.3: Number and Percentage of RUS’ Electricity Loan Distribution Borrowers, by Range of Three Ratio Measures,
December 31, 1992, Through December 31, 1995
                                     1992                     1993                     1994                    1995
Ratio measure and range        Number   Percentage        Number      Percentage       Number    Percentage       Number       Percentage
Current ratio
Five or more times                115             13.3          98             11.5        86             10.3           84              10.4
Two to up to five times           372             43.1         354             41.4       340             40.9          310              38.6
Up to two times                   301             34.9         309             36.1       290             34.9          310              38.6
Less than one time                 75              8.7          94             11.0       116             13.9          100              12.4
Debt-to-asset ratio
40 percent or less                 92             10.7         100             11.7       101             12.1           94              11.7
41 to 70 percent                  660             76.5         685             80.1       674             81.0          657              81.7
71 to 99 percent                  108             12.5          67              7.8        54              6.5           51               6.3
100 percent or more                 3              0.3            3             0.4          3             0.4            2               0.2
Times-interest-earned ratio
Five or more times                 54              6.3          91             10.6        70              8.4           63               7.8
Two to up to five times           497             57.6         573             67.0       504             60.6          479              59.6
Up to two times                   291             33.7         181             21.2       238             28.6          228              28.4
Less than one time                 21              2.4          10              1.2        20              2.4           34               4.2
                                          Note: Percentage of borrowers for each ratio may not add to 100.0 percent due to rounding.

                                          Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                          by electricity loan borrowers.




Table III.4: Number and Percentage of RUS’ Electricity Loan Power Supply Borrowers, by Range of Net Worth,
December 31, 1992, Through December 31, 1995
                                     1992                     1993                   1994                                  1995
Range of net worth             Number   Percentage        Number      Percentage       Number    Percentage       Number       Percentage
$100 million or more                6             11.1            7            13.0          7            13.0            7              13.7
$10 million to $99.9 million       30             55.6          30             55.6        31             57.4           30              58.8
$1 million to $9.9 million          4              7.4            4             7.4          3             5.6            5               9.8
$100,000 to $999,999                1              1.9            1             1.9          1             1.9            1               2.0
$0 to $99,999                       0                0            0               0          1             1.9            0                0
Less than $0                       13             24.1          12             22.2        11             20.4            8              15.7
Total                              54           100.0           54            100.0a       54           100.0a           51            100.0
                                          a
                                              Does not add due to rounding.

                                          Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                          by electricity loan borrowers.




                                          Page 37                                                     GAO/RCED-97-82 RUS’ Utility Loans
                                          Appendix III
                                          Financial Information on Borrowers With
                                          Electricity and Telecommunications Loans




Table III.5: Number and Percentage of RUS’ Electricity Loan Power Supply Borrowers, by Range of Profit, December 31,
1992, Through December 31, 1995
                                     1992                     1993                   1994                     1995
Range of profit               Number   Percentage         Number      Percentage       Number    Percentage        Number      Percentage
$10 million or more               10              18.5            7            13.0          7            13.0            9              17.6
$1 million to $9.9 million        23              42.6          32             59.3        34             63.0           27              52.9
$100,000 to $999,999              10              18.5            5             9.3          4             7.4            8              15.7
$0 to $99,999                      5               9.3            4             7.4          3             5.6            3               5.9
Less than $0                       6              11.1            6            11.1          6            11.1            4               7.8
                                                                                   a                           a
Total                             54            100.0           54            100.0        54           100.0            51            100.0a
                                          a
                                              Does not add due to rounding.

                                          Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                          by electricity loan borrowers.




Table III.6: Number and Percentage of RUS’ Electricity Loan Power Supply Borrowers, by Range of Three Ratio Measures,
December 31, 1992, Through December 31, 1995
                                     1992                     1993                   1994                    1995
Ratio measure and range       Number   Percentage         Number      Percentage       Number    Percentage        Number      Percentage
Current ratio
Five or more times                13              24.1            6            11.1          5             9.3            3               5.9
Two to up to five times           24              44.4          26             48.1        29             53.7           28              54.9
Up to two times                   14              25.9          18             33.3        15             27.8           17              33.3
Less than one time                 3               5.6            4             7.4          5             9.3            3               5.9
Debt-to-asset ratio
40 percent or less                 0                 0            0              0           0               0            0                0
41 to 70 percent                   8              14.8            9            16.7        12             22.2           11              21.6
71 to 99 percent                  33              61.1          33             61.1        30             55.6           32              62.7
100 percent or more               13              24.1          12             22.2        12             22.2            8              15.7
Times-interest-earned ratio
Five or more times                 1               1.9            1             1.9          0               0            3               5.9
Two to up to five times            6              11.1          11             20.4          6            11.1            6              11.8
Up to two times                   41              75.9          36             66.7        42             77.8           38              74.5
Less than one time                 6              11.1            6            11.1          6            11.1            4               7.8
                                          Note: Percentage of borrowers for each ratio may not add to 100.0 percent due to rounding.

                                          Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                          by electricity loan borrowers.




                                          Page 38                                                     GAO/RCED-97-82 RUS’ Utility Loans
                                          Appendix III
                                          Financial Information on Borrowers With
                                          Electricity and Telecommunications Loans




Table III.7: Number and Percentage of RUS’ Telecommunications Loan Borrowers, by Range of Net Worth, December 31,
1992, Through December 31, 1995
                                     1992                  1993                    1994                   1995
Range of net worth             Number   Percentage        Number      Percentage       Number   Percentage       Number       Percentage
$100 million or more               11              1.2            7             0.8         8             0.9            4                0.5
$10 million to $99.9 million      148             16.3         154             17.3       158            18.0         172                20.3
$1 million to $9.9 million        603             66.3         607             68.2       608            69.3         593                69.9
$100,000 to $999,999              142             15.6         118             13.3       100            11.4           76                9.0
$0 to $99,999                       6              0.7            4             0.4         1             0.1            0                 0
Less than $0                        0                0            0              0          2             0.2            3                0.4
Total                             910           100.0a         890            100.0       877          100.0a         848            100.0a
                                          a
                                              Does not add due to rounding.

                                          Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                          by telecommunications loan borrowers.




Table III.8: Number and Percentage of RUS’ Telecommunications Loan Borrowers, by Range of Profit, December 31, 1992,
Through December 31, 1995
                                     1992                  1993                    1994                    1995
Range of profit                Number   Percentage        Number      Percentage       Number   Percentage       Number       Percentage
$10 million or more                21              2.3          11              1.2        16             1.8            6                0.7
$1 million to $9.9 million        225             24.7         213             23.9       228            26.0         240                28.3
$100,000 to $999,999              553             60.8         565             63.5       555            63.3         530                62.5
$0 to $99,999                     100             11.0          82              9.2        68             7.8           58                6.8
Less than $0                       11              1.2          19              2.1        10             1.1           14                1.7
                                                                                   a
Total                             910           100.0          890            100.0       877          100.0          848            100.0
                                          a
                                              Does not add due to rounding.

                                          Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                          by telecommunications loan borrowers.




                                          Page 39                                                    GAO/RCED-97-82 RUS’ Utility Loans
                                         Appendix III
                                         Financial Information on Borrowers With
                                         Electricity and Telecommunications Loans




Table III.9: Number and Percentage of RUS’ Telecommunications Loan Borrowers, by Range of Three Ratio Measures,
December 31, 1992, Through December 31, 1995
                                     1992                  1993                    1994                   1995
Ratio measure and range       Number   Percentage      Number      Percentage       Number      Percentage       Number       Percentage
Current ratio
Five or more times               359          39.5         288             32.4          299             34.1          296              34.9
Two to up to five times          341          37.5         377             42.4          375             42.8          344              40.6
Up to two times                  123          13.5         137             15.4          132             15.1          135              15.9
Less than one time                87           9.6           88              9.9          71              8.1           73               8.6
Debt-to-asset ratio
40 percent or less               179          19.7         197             22.1          218             24.9          244              28.8
41 to 70 percent                 567          62.3         552             62.0          528             60.2          503              59.3
71 to 99 percent                 164          18.0         141             15.8          129             14.7           98              11.6
100 percent or more                0               0          0                0            2             0.2            3               0.4
Times-interest-earned ratio
Five or more times               369          40.5         366             41.1          375             42.8          364              42.9
Two to up to five times          446          49.0         421             47.3          422             48.1          392              46.2
Up to two times                   84           9.2           84              9.4          70              8.0           78               9.2
Less than one time                11           1.2           19              2.1          10              1.1           14               1.7
                                         Note: Percentage of borrowers for each ratio may not add to 100.0 percent due to rounding.

                                         Source: GAO’s analysis of RUS’ automated database containing financial information submitted
                                         by telecommunications loan borrowers.




                                         The following is a general description of the measures used to describe the
Definitions of                           financial characteristics of RUS’ borrowers.
Financial Statistics for
RUS’ Borrowers                           Total assets. Includes current assets (e.g., cash and equivalents),
                                         investments, net plants (e.g., plants in service and under construction, less
                                         accumulated depreciation), and other noncurrent assets and/or property.

                                         Total liabilities. Includes current liabilities, long-term debt, and other
                                         noncurrent liabilities and/or deferred credits.

                                         Total equity or net worth. Includes capital stock and/or patronage capital,
                                         memberships, and capital credits.

                                         Operating revenues. Revenues from operations.




                                         Page 40                                                     GAO/RCED-97-82 RUS’ Utility Loans
Appendix III
Financial Information on Borrowers With
Electricity and Telecommunications Loans




Total operating expenses. Expenses from operations. These expenses
include, for example, for power supply borrowers with electricity loans,
the costs of producing electricity and/or purchasing power, transmission
and distribution expenses, and maintenance expenses. For distribution
borrowers with electricity loans, this includes the costs of acquiring power
and distribution operating and maintenance expenses. For borrowers with
telecommunications loans, this includes plant and nonplant specific
operating expenses.

Net operating income. Operating revenues less total operating expenses.

Total net income (profit or loss). Includes operating income plus
nonoperating income and/or capital credits less fixed charges (e.g.,
interest on funded debt and other interest expense).

Current ratio. The ratio is used to measure the extent to which current
assets, if liquidated, would cover current liabilities. It is computed by
dividing current assets by current liabilities.

Debt-to-asset ratio. The ratio is used to measure the proportion of assets
that are financed by debt. It is computed by dividing total debt by total
assets.

Times-interest-earned ratio. The ratio is used to measure the extent to
which interest on debt can be paid by net income. It is computed by
dividing the sum of total net income and interest on debt by interest on
debt.




Page 41                                        GAO/RCED-97-82 RUS’ Utility Loans
Appendix IV

Comments From the U.S. Department of
Agriculture




              Page 42         GAO/RCED-97-82 RUS’ Utility Loans
Appendix IV
Comments From the U.S. Department of
Agriculture




Page 43                                GAO/RCED-97-82 RUS’ Utility Loans
Appendix V

Objectives, Scope, and Methodology


              This appendix contains information on our objectives, scope, and
              methodology in conducting this review. In April 1996, we initiated a survey
              of RUS’ loan portfolios. Subsequently, on October 17, 1996, the Chairman of
              the Committee on the Budget, House of Representatives, wrote to us
              expressing his concern about the financial risks associated with RUS’
              lending and asking that we report to him on the (1) financial condition of
              the electricity, telecommunications, and water and waste disposal loan
              portfolios and (2) financial characteristics of borrowers having electricity
              and telecommunications loans.

              In conducting our review, we focused on the financial condition of RUS’
              loan portfolios at the end of fiscal year 1996 and, for trend information, the
              preceding 4 fiscal years. For the financial characteristics of the electricity
              and telecommunications borrowers, we focused on the end of calendar
              year 1995, the most recent year for which RUS had information available on
              the programs’ borrowers, and the preceding 3 calendar years.

              To compile background information and to gain an understanding of how
              the utility loan programs operate, we interviewed numerous RUS officials,
              including the Assistant Administrators and/or Deputy Assistant
              Administrators for electricity, telecommunications, and water and waste
              disposal. We reviewed the basic statutory authority for the programs—the
              Rural Electrification Act of 1936, as amended, for the electricity and
              telecommunications programs and the Consolidated Farm and Rural
              Development Act, as amended, for the water and waste disposal
              programs—and relevant parts of RUS’ implementing regulations and
              internal policy guidance. We also reviewed RUS’ various publications,
              pamphlets, and reports that describe the utility loan programs and USDA’s
              Budget Explanatory Notes for Committee on Appropriations for fiscal
              years 1994 through 1997. Furthermore, we reviewed prior reports by GAO
              and USDA’s Office of Inspector General that were issued during fiscal years
              1992 through 1996. Finally, we reviewed the provisions that apply to RUS
              and its utility loan programs that are contained in the Federal Crop
              Insurance Reform and Department of Agriculture Reorganization Act of
              1994.

              To compile information on the number and dollar amount of loans that RUS
              made or guaranteed during fiscal years 1992 through 1996 and on RUS’
              subsidy and administrative costs for operating the utility loan programs
              during those years, we used RUS’ various financial reports, the
              Department’s budget explanatory notes, and information provided to us by
              the Budget Division in USDA’s Rural Development mission area. During the



              Page 44                                        GAO/RCED-97-82 RUS’ Utility Loans
Appendix V
Objectives, Scope, and Methodology




course of our study, we provided RUS with schedules of the loan and cost
information that we had compiled; RUS officials reviewed these schedules
and did not suggest any revisions to the tabulated data. The descriptive
information on credit reform was extracted from prior GAO reports.

Most of the financial data presented in this report are unaudited
information that we extracted from RUS’ reports and automated records.
We did not verify the accuracy of the information contained in the
agency’s reports and automated records.

Our analysis of the financial condition of RUS’ portfolios covered fiscal
years 1992 through 1996. To determine the financial condition of the
electricity, telecommunications, and water and waste disposal loan
portfolios, we reviewed RUS’ financial reports, other information that RUS
provided to us, and data contained in the agency’s automated records. We
used these data sources to compile information on outstanding principal
in each program and the portion of outstanding principal that was owed by
delinquent borrowers at the end of fiscal years 1992 through 1996, and the
extent of restructuring and/or reamortizing of loans and the losses that RUS
has incurred during these years. We did not adjust the outstanding loan
amounts to reflect the allowance for losses that RUS includes in its
financial statements nor did we assess the adequacy of reserves on the
loans. During the course of our study, we provided RUS with schedules of
the outstanding and delinquent loan information that we had compiled; RUS
officials reviewed these schedules and did not suggest any revisions to the
tabulated data.

Additionally, to identify problem borrowers other than those that were
delinquent, we interviewed, among others, the Program Advisor in the
Financial Services Staff—the RUS office that works on resolving problem
loan accounts—the Director of the Electric and Telephone Financial
Operations Division, and the Director of the Power Supply Division in the
electricity program. We compiled specific information on each problem
borrower from the agency officials we interviewed and from RUS’ financial
reports and automated records.

Our analysis of the financial characteristics of borrowers covered calendar
years 1992 through 1995. To determine the financial characteristics of
borrowers having electricity and telecommunications loans, we reviewed
RUS’ annual statistical reports covering calendar years 1992 through 1994
that contain financial information submitted by electricity and
telecommunications borrowers. Although borrowers had submitted to RUS



Page 45                                       GAO/RCED-97-82 RUS’ Utility Loans
Appendix V
Objectives, Scope, and Methodology




financial information for calendar year 1995 and the agency had prepared
the automated files that are used to produce the 1995 annual statistical
reports, it had not published the reports until our work was close to being
completed. In addition, we accessed the agency’s automated files for
calendar years 1992 through 1995 containing the borrower-submitted
information that is used to prepare the annual statistical reports.

We used the annual statistical reports to identify the financial information
to extract from the automated files. We used the automated files to
analyze selected balance sheet and income statement information,
including borrowers’ current and total assets, current and total liabilities,
net worth (equity), operating revenues, operating expenses, operating
income, and net income (profit or loss). We analyzed similar information
for all borrowers who submitted financial information to RUS.

For each calendar year, we calculated totals and averages for the selected
balance sheet and income statement items. We also used the balance sheet
and income statement information to calculate various financial ratios for
each borrower, including current ratio, debt-to-asset ratio, and
times-interest-earned ratio. We categorized borrowers in ranges of the
various balance sheet and income statement items and in ranges of the
ratios. This allowed us to use consistent information to analyze borrowers
in these two programs. RUS uses some of these same items and measures
in its monitoring of borrowers.

We did not verify the accuracy of the financial submissions from the
borrowers to RUS. However, we did perform various tests to ensure the
correctness of the information contained in the automated files, such as
whether assets less liabilities equals net worth, operating revenues less
operating expenses equals operating income, and operating income plus or
minus nonoperating income/expenses and adjustments equals net income
(profit or loss). When the balance sheet or income statement information
did not equal, we excluded the borrowers from the analyses for the year(s)
in question. Specifically, we excluded five electricity distribution
borrowers for calendar year 1994, one telecommunications borrower for
1995, three telecommunications borrowers for 1994, and four
telecommunications borrowers for 1993. We verified that the correct
information had been extracted from the automated records by, for
example, comparing those data with information in RUS’ 1992 through 1995
statistical reports for electricity and telecommunications borrowers. We
also compared the results of our computation of the times-interest-earned




Page 46                                        GAO/RCED-97-82 RUS’ Utility Loans
Appendix V
Objectives, Scope, and Methodology




ratios with those contained in the 1992 through 1995 reports for electricity
distribution and telecommunications borrowers.

The results of our analysis covered more borrowers than are covered in
RUS’ annual statistical reports because, for example, we included
borrowers that submitted information to RUS after the submission date for
publishing its annual reports. The information submitted after that date is
maintained in the agency’s automated files. Also, while our analysis covers
most borrowers with electricity and telecommunications loans, some
borrowers are excluded because they did not submit financial information
to RUS. For example, the automated files covering 1995 did not have
financial information on 74 borrowers.

We did not attempt to determine the financial characteristics of the
borrowers with water and waste disposal loans because most are public
entities rather than private firms.

We conducted our review from April 1996 through February 1997 in
accordance with generally accepted government auditing standards. USDA
reviewed a draft of this report. The Department’s comments are contained
in appendix IV.




Page 47                                       GAO/RCED-97-82 RUS’ Utility Loans
Appendix VI

Major Contributors to This Report


                       Emi N. Brock, Assistant Director
Resources,             Jerry D. Hall
Community, and         Rebecca L. Johnson
Economic               Renee D. McGhee-Lenart
                       F. John Schaefer, Jr.
Development Division   Patrick J. Sweeney




(150711)               Page 48                            GAO/RCED-97-82 RUS’ Utility Loans
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